Fixed versus adjustable rate loans

A fixed-rate loan features the same payment amount over the life of your loan. Your property taxes increase, or rarely, decrease, and your insurance rates might vary as well. For the most part payments for your fixed-rate mortgage will increase very little.

During the early amortization period of a fixed-rate loan, a large percentage of your monthly payment pays interest, and a much smaller part goes to principal. As you pay , more of your payment goes toward principal.

Borrowers can choose a fixed-rate loan to lock in a low rate. Borrowers select these types of loans when interest rates are low and they wish to lock in at the lower rate. For homeowners who have an ARM now, refinancing into a fixed-rate loan can provide more stability in monthly payments. If you have an Adjustable Rate Mortgage (ARM) now, we'll be glad to assist you in locking a fixed-rate at a favorable rate. Call Reliance Mortgage Service, Inc at 562 320-0510 for details.

There are many kinds of Adjustable Rate Mortgages. Generally, interest rates for ARMs are determined by an outside index. A few of these are: the 6-month Certificate of Deposit (CD) rate, the 1 year rate on Treasure Securities, the Federal Home Loan Bank's 11th District Cost of Funds Index (COFI), or others.

The majority of Adjustable Rate Mortgages are capped, so they can't go up above a certain amount in a given period. There may be a cap on interest rate variances over the course of a year. For example: no more than a couple percent a year, even though the underlying index goes up by more than two percent. Your loan may feature a "payment cap" that instead of capping the interest directly, caps the amount the monthly payment can increase in one period. Plus, the great majority of ARMs have a "lifetime cap" — this means that your interest rate can't go over the capped amount.

ARMs most often feature the lowest, most attractive rates at the beginning of the loan. They usually provide the lower rate for an initial period that varies greatly. You've probably heard of 5/1 or 3/1 ARMs. For these loans, the initial rate is fixed for three or five years. It then adjusts every year. These loans are fixed for a number of years (3 or 5), then adjust after the initial period. These loans are often best for borrowers who anticipate moving in three or five years. These types of adjustable rate programs most benefit people who will sell their house or refinance before the loan adjusts.

You might choose an ARM to get a very low initial rate and plan on moving, refinancing or absorbing the higher rate after the introductory rate expires. ARMs are risky if property values decrease and borrowers can't sell their home or refinance their loan.

Have questions about mortgage loans? Call us at 562 320-0510. We answer questions about different types of loans every day.

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